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October 09, 2006
Microfinance Crosses Continental Divide with $100 Million Commitment from TIAA-CREF
    by Bill Baue

TIAA-CREF inaugurated its Global Microfinance Investment Program by purchasing from ProCredit Holdings $43 million in private equity shares, a new strategy in microfinance.


Looking back on September 2006 from the future, historians may consider last month as a tipping point in the development of microfinance as its own asset class. Two developments in particular helped shift the scales. At the Clinton Global Initiative (CGI), Citigroup (ticker: C) announced $100 million in loans to 132 microfinance institutions (MFIs) in 39 different countries. The week before, the huge academic retirement fund manager TIAA-CREF announced its new $100 million Global Microfinance Investment Program (GMIP), jumpstarted with a $43 million private equity investment in ProCredit Holding.

While both are clearly important, the TIAA-CREF announcement breaks significant new ground on two counts. First, while Citigroup is employing the traditional mechanism of debt to MFIs for feeding directly into microfinance loans, TIAA-CREF sets precedent by providing broader structural support for microfinance through an equity investment that supports ProCredit's entire infrastructure. Second, assets for the deal come from TIAA Traditional, a $160 billion guaranteed fixed annuity account with nearly 2.3 million participants, instead of the CREF Social Choice Account (SCA), the $8 billion socially responsible investing (SRI) option used by almost half a million investors. The move thus represents a mainstreaming of SRI within TIAA-CREF.

The investment, the first major move by TIAA-CREF's new Social and Community Investing Department established earlier this year, involves primarily new shares issued by ProCredit, as well as some purchased from the International Finance Corporation (IFC). The move also responded to a recent survey of TIAA-CREF participants revealing broad support for SRI strategies that address human rights and community development. Microfinance is a particularly effective tool for advancing the double bottom line of social as well as financial returns.

The announcement met with kudos from microfinance experts.

"This deal crosses the Continental Divide," said David Satterthwaite, chief editor of
MicroCapital.org, a website covering the microfinance industry, and CEO of Prisma MicroFinance. "TIAA-CREF's direct equity investment was very shrewd given the stream of guaranteed debt financing that ProCredit manages."

For example the Overseas Private Investment Corporation (OPIC), the US government agency that provides financing and political risk insurance to US businesses investing overseas, guaranteed a $30 million debt investment Citigroup made in ProCredit last year.

Scott Budde, head of TIAA-CREF's new Social and Community Investment Department and manager of GMIP, notes that this was one aspect of TIAA-CREF's decision to go with an equity investment, and to go with ProCredit.

"Equity is a particularly powerful way to get double-bottom-line returns because, in a financial institution like ProCredit, it has been leveraged with deposits and debt," Mr. Budde told SocialFunds.com.

ProCredit differs from many other MFIs by offering equity in addition to debt investment. ProCredit also differs in that it owns each of the micro-banks that make microfinance loans that help lift borrowers out of poverty in developing economies, whereas most MFIs work with loose affiliations of banks.

"This unique aspect has resulted in ProCredit being very effective at tapping into capital markets," said Mr. Budde. "ProCredit can issue equity that it can then downstream to its microfinance banks in each of about 20 countries that then goes right out to borrowers."

Borrowers pay interest rates on microfinance loans of anywhere from mid-teens in more developed countries where ProCredit operates, such as Bulgaria, to 30 to 40 percent in the least developed countries, such as the Congo or Sierra Leone, according to Mr. Budde. While these rates may sound high, they are fairly standard for microfinance due to the high degree of risk incurred, the extensive technical assistance provided, and the provision of alternatives to the only other sources of capital: loan sharks who charge 100 to 200 percent interest.

TIAA-CREF does not disclose its rate of return for private equity investment, but Mr. Budde expects it to fall "north of the public markets and south of venture capital."

GMIP also met with approval from longtime critics.

"This is a very good step," said Neil Wollman, coordinator of the Make TIAA-CREF Ethical campaign and a senior fellow of the Peace Studies Institute at Manchester College. "I see some benefits from being invested in the TIAA Traditional Account in making SRI more mainstream."

"Anywhere that socially beneficial investment can be placed is a plus for all concerned, in my mind, no matter the nature of the rest of the fund," Prof. Wollman told SocialFunds.com.

TIAA-CREF took into account the fact that 70 percent of Social Choice Account investors also invest in TIAA Traditional. The remaining 30 percent may avoid TIAA Traditional because it holds Treasury Bills, which provide direct support for the Department of Defense and hence many SRI funds avoid them on anti-militarism grounds.

"But this does not mean TIAA-CREF should not continue to strengthen the Social Choice Account," said Prof. Wollman. "The inclusion of community investing, social venture capital, and some enhanced screening will make SCA a model SRI fund to be emulated by others."

Mr. Budde confirmed that investing in community development financial institutions (CDFIs) is high on the agenda of the Social and Community Investing Department. The department has also expanded its relationship with KLD Research & Analytics, which provides the data upon which the department bases its screens. Finally, TIAA-CREF will focus increasing attention on social issues as it ramps up its shareowner advocacy and engagement.

 

 
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